Harle v Legal Practitioners Liability Committee; Alianda Close Pty Ltd v Citibank Ltd

[2001] VSC 219

IN THE SUPREME COURT OF VICTORIA Not Restricted

AT MELBOURNE

COMMERCIAL AND EQUITY DIVISION

No. 2046 of 1999

COMMERCIAL LIST  F. 5206

ALIANDA CLOSE PTY LTD	Plaintiff
and
CITIBANK LIMITED and DOUGLAS JOHN MATTHEW HARLE	Defendants
and
LEGAL PRACTITIONERS LIABILITY COMMITTEE	Third Party

---

JUDGE:	Mandie J
WHERE HELD:	Melbourne
DATE OF HEARING	5-8, 12-15 February 2001
DATE OF JUDGMENT:	5 July 2001
CASE MAY BE CITED AS:	Harle v Legal Practitioners Liability Committee
MEDIUM NEUTRAL CITATION:	[2001] VSC 219

---

INSURANCE – professional indemnity insurance – civil liability in connection with legal practice – dishonesty exclusion

---

APPEARANCES:	Counsel	Solicitors
For the plaintiff	Mr P Riordan QC with Mr D Williams (to 13/2/01)	Pearsons
For the 1st defendant For the 2nd defendant For the third party	Mr R C Macaw QC with Mr J D Elliott (to 13/2/01) Mr P Riordan QC (from 14/2/01) with Mr J R Dixon Mr M Clarke	Lander & Rogers H S Wise Gershov & Co Hunt & Hunt

HIS HONOUR:

1. It will be convenient to refer to the persons involved in this case by the following abbreviations:

Alianda	Alianda Close Pty Ltd, the plaintiff
Burton	Evelyn Burton, a purveyor of the investment proposal and a director of Leveraged
Citibank	Citibank Ltd, the first defendant
Cox	Robin Cox, one of the fraudsters
Enterprise	Enterprise Funding & Investment Pty Ltd,  McKay’s company
Ms Harle	Jennifer Mary Harle, a director of Alianda
Harle	Douglas John Matthew Harle, the second defendant, brother of Ms Harle and a solicitor
Roy Harle	Roy Aubrey Harle, father of Harle and of  Ms Harle
IUCF	International United Charities Foundation, a purported charity
Leveraged	Leveraged Equity Investments International Pty Ltd, a company associated with Burton and Steele
McKay	William Stanley McKay, a purveyor of the investment proposal
Mayman	Colin J Mayman, one of the fraudsters
Mr Ozuslu	Sabit Ozuslu, husband of Ms Harle
Scotside	Scotside International (Aust) Group, an entity associated with Mayman
Slattery	in-house lawyer for Leveraged
Steele	Kenneth Maxwell Steele, a purveyor of the investment proposal and a director of Leveraged
The insurer	Legal Practitioners Liability Committee, the third party
Tubman	Esther Nysietta Tubman, one of the fraudsters

1. Alianda is the trustee of a family trust the principal beneficiaries of which include a married couple, Mr Ozuslu and his wife Ms Harle.  Alianda invested US$2 million in circumstances which led to the whole of those funds being lost.  As a result Alianda brought this proceeding seeking to recover damages against the defendants.  The first defendant  Citibank was involved in the transfer of the funds to the United States.  The second defendant Harle is Ms Harle's brother and a solicitor.  Alianda alleged that Harle acted as its solicitor in the relevant transaction and, by professional negligence, caused the funds to be lost or to become irrecoverable.  Harle joined the insurer as a third party.

1. When the trial commenced all parties were contesting liability.  In the course of the hearing (at the commencement of day 6), Alianda announced that it had settled with both defendants and consent orders were sought.  As a result the only issues to be determined by the Court are those between Harle and the insurer.  Harle seeks indemnity from the insurer in the sum of A$1.5 million which is the sum agreed to be paid by him to Alianda.  The insurer raises two principal defences.  First, the insurer says that Harle was not acting as Alianda's solicitor and that his liability to Alianda did not arise out of or in connection with his legal practice.  Second, the insurer says that if Harle acted as a solicitor his relevant conduct in breach of duty was dishonest and the insurer was not liable to indemnify him in respect of liability arising from his dishonesty.

Facts

1. Alianda is the trustee of the Oz Family Trust the principal beneficiaries of which are Mr Ozuslu, Ms Harle and their children.  Ms Harle, who was born on 7 September 1947 in Templestowe, Victoria, was at all relevant times a director of Alianda.

1. Ms Harle has a Bachelor of Arts, a Diploma of Education and a post-graduate Bachelor of Education from Melbourne University (gained in 1971).  In 1974 she married Mr Ozuslu, who had been born in Turkey in 1945.  They lived or were based in Turkey until 1994.  During that time Ms Harle worked as a high school teacher and Mr Ozuslu developed his business, a chain of shops selling souvenirs, gifts and other articles to tourists.

1. Harle is about 18 months older than Ms Harle and has been practising continuously as a solicitor since 1970, for most of that time as a sole practitioner. According to Ms Harle, Harle had acted from the late 1970s as their solicitor in Australia. Harle is also a certified practising accountant. I am satisfied that, although he used his accountancy skills in his legal practice and mentioned his CPA qualification on his solicitor's letterhead, he did not at any relevant time carry on a practice as an accountant.

1. In 1994-5 the couple and their two children came to Australia from Turkey “semi-permanently”, in the sense of intending to use Australia as their base.  According to the evidence of Mr Ozuslu and Ms Harle (which I accept), they instructed Harle in 1994 to act on their behalf and he so acted in the purchase of their home here and in relation to legal matters arising out of their move including the transfer of funds to Australia and the incorporation of Alianda.  Ms Harle testified and I accept that as their solicitor he had also been to Turkey and advised and assisted in negotiations for the sale of some of their equity in businesses in Turkey.

1. Harle was introduced to an investment proposal described as a “trading programme” by one McKay.  Harle first met McKay in late 1992 through a client. In 1994 McKay told Harle that he had almost 30 years' experience in the banking industry.  McKay told Harle at that time that he had an opportunity to be involved in a “trading programme” with a United States company, Rache & Co. and he showed Harle documentation in relation to the trading programme including reports as to the probity of those involved in or associated with the operation of the “trading programme”.  The “trading programme” did not proceed.  However, the experience convinced Harle of McKay's credibility.

1. In early May 1995 McKay told Harle that he knew of an opportunity to participate in a “trading programme” through a chance meeting with a colleague named Steele with whom he had previously worked in the Commonwealth Bank of Australia more than 20 years previously.  McKay told Harle that Steele was a director and shareholder with Burton in a company (Leveraged) and that Leveraged had the exclusive option to place three investments of US$2 million each in a trading programme in association with a charitable organisation and that each investor would receive a return of US$20 million on their investment of US$2 million which would be secured by a guarantee from a “top 100 world ranked bank” which he called a “Prime Bank Guarantee”.  McKay told Harle that the investor or lender of US$2 million would earn US$500,000 per week for 40 weeks, the charity would earn a similar amount per week and the promoters would receive 1% of the trading profit - all this by so-called “leveraging” of the funds invested. McKay told Harle that there was a “master contract” controlling the trading programme and the transaction which was not available for inspection “because the banks wouldn’t formally acknowledge that this form of trading existed”. McKay asked Harle if he knew of any possible investors.

1. Harle mentioned the said proposal to Mr Ozuslu who expressed interest and asked for more information. Ms Harle said that in the first instance  she was not directly involved in discussions between Mr Ozuslu and Harle concerning the suggested investment of funds.

1. As I have said, Mr Ozuslu had instructed Harle in late 1994 as his solicitor in respect of aspects of Ozuslu's business operations in Turkey.  Harle had briefed Victorian counsel to advise and conduct some negotiations.  In early 1995, in Turkey, Mr Ozuslu had sold his interest in a Turkish business.  Mr Ozuslu and Ms Harle wished to repatriate the sale proceeds to Australia and instructed Harle to act as their solicitor in connection with that matter.  This led to the formation of Alianda and its appointment as trustee of an existing family trust.  Alianda opened an account at the ANZ Bank and the sale proceeds were transferred into that account as an accretion to the corpus of the trust.  In providing advice to the couple Harle had sought the opinion of both a barrister specialising in tax and a tax accountant.  Harle also attended to the conveyancing for Ms Harle in respect of the house which the couple purchased upon their return from Turkey.   On a subsequent occasion Harle briefed counsel to provide tax advice to Mr Ozuslu.

1. In May 1995 the couple spoke together with Harle concerning the investment proposal.  In substance Harle said to them, in several conversations between mid-May 1995 and the end of May 1995, that the proposal entailed the following:

·    a 12 months and 2 weeks loan of US$2M;

·    the repayment of the principal which would be guaranteed by a reputable bank which Harle described as a "prime bank";

·    a “trading profit” of US$500,000 per week over 40 weeks (ie a profit of US$20 million) but this profit was not guaranteed.

1. Ms Harle deposed that she did not fully understand the details of the proposal.  She said that Harle explained to her that “these sort of returns” do happen with “these sort of investments” and that he attempted to explain to her how it all worked and he “did diagrams” (a series of boxes with arrows showing the money flow) but she never came to understand it completely. She said that Harle told them that the proposal had been communicated to him by McKay but that she did not meet McKay at any time during the course of the negotiations although she spoke to him on the telephone “a couple of times”.  She had met him once about two years earlier on a social occasion. I accept her evidence on these matters.

1. Harle told McKay that Mr Ozuslu and Ms Harle were interested in his proposal.  McKay told Harle that the trading programme was operated on behalf of a charity endorsed by the United Nations (ICUF) and would be conducted through a New York securities broker, Smith Barney.  On 15 May 1995 Harle received by fax from McKay a number of documents.  These documents included such innocuous documents as an extract from the New York City telephone directory containing an entry for “Smith Barney Shearson”, business directory entries for Smith Barney Inc. and Chemical Bank and two pages about Liberia from a publication entitled “The Nations of the World”.

1. There was a letter on the letterhead of Enterprise (McKay’s company) stating:

“  The Programme.

Enterprise Funding & Investment Pty. Ltd. (EFI) has through its long term association with Mr. Ken Steele and Mrs. Evelyn Burton of Leveraged Equity Investments International Pty. Ltd. (LEII) been offered an opportunity to participate in a Leveraged Investment Programme sanctioned by the US Federal Reserve and operated through a leading Securities House in the US for the sole purpose of raising funds for refugee work in the Republic of Liberia.

Ms. Esther Nysietta Tubman Counsellor at Law in Liberia and working from the Law Office of Ms. Olive C. Howard at 604, Central Avenue, East Orange New Jersey USA is the Founder and Administrator of a registered US charitable organisation, namely International United Charities Foundation U.S.A. which was incorporated in Delaware USA on 31/12/1990 under the Registration Code No.209/1.

….

As a result of her persistant [sic] push for her cause she was introduced to a Federal Reserve Trader who assisted in setting up this Programme with the Securities House.  LEII has been granted a small number of these contracts and has offered five such contracts to EFI for its clients.  Once these have been issued there not be another issue until next year and there is no guarantee that EFI will be offered an opportunity to participate in that issue.

EFI has done its due diligence on the programme and is happy to offer it to its clients on the following basis.

1.Investor issues Letter of Intent together with Proof of Funds letter from Bank.

2.Investor signs a Joint Venture Agreement with LEII who has the Master Contract with Ms. Tubman the Securities House and the Programme Trader.

3.Investor remits US$2 million to Securities House Trust Account.

4.Securities House Arranges for Bank Guarantee to be issued in Investors name.

5.On receipt and authentication of Bank Guarantee Securities House issues investor Safe Keeping receipt in investors name and releases funds into Trading Programme account.

6.Term of programme Forty (40) weeks over Twelve (12) months.

7.[obscured]

8.Payment made by Bank Endorsed Pay Order from the Trading Account.

9.Bank Guarantee returned for Principal Investment funds at end of 12 months.

10.The initial US$2 million invested is leveraged up by the Securities House to US$100 million for the purpose of this special aid programme and the investor receives his return on US$100 million.

EFI holds copies of all the relevant documentation to support all Ms Esther Tubmans claims and is pleased to offer you One (1) of the Five (5) contracts it holds with LEII.

Contracts have been issued to Twenty (20) potential investors and will be received on first come first served basis until the Five (5) contracts have been signed and completed.

As time is of the essence with this offer your earliest reply would be appreciated as it is anticipated all the contracts will be taken up by Friday 19^th May 1995.”

1. There was also a pro forma "letter of intent" addressed to Leveraged reading as follows:

“I/We (name of Investor, address, telephone & facsimile numbers) hereby apply to participate in a Joint Venture Private Placement with Leveraged Equity Investments International Pty. Ltd. for sole purpose of investing in a Prime Bank Instrument Trading Programme for profit.

I/We hereby confirm with full Corporate and Legal responsibility that I/We are the Principal(s) in this transaction and as such have full authority to issue this letter on behalf of (Name & Address of Investor).

I/We confirm that we have had the Trading Programme explained to us and understand that subject to our acceptance of the Terms & Conditions of the Joint Venture Agreement with Leveraged Equity Investments International Pty. Ltd., I/We agree to participate in the said Trading Programme.

I/We confirm that I/We further understand that all matters appertaining to this Private Placement Trading Programme are confidential and any evidence of circumvention or unauthorised disclosure by any of the parties of their Agents or employees constitutes a breach of this application and will result in legal action against those parties.

I/We confirm that I/We have an amount of US$2 million in funds ready to place into the Trading Programme for use in the manner that has been explained.

I/We declare under International Law and all regulatory bodies that these funds are good, clean, clear funds legally earned.”

1. Harle testified that during the period from 15 May to 24 May 1995 he had many discussions and meetings with McKay and Steele and Burton at the business premises of Leveraged in Collins Street, Melbourne and also had discussions with Slattery.  Slattery told Harle that he ran his own legal practice but that his time was almost totally taken up as in-house lawyer for Leveraged.  Slattery told Harle that Leveraged had successfully completed many overseas loan transactions and that Burton was living in the Como Hotel at South Yarra while she waited for settlement of a house property which she had purchased in Toorak for $6 million.

1. Harle said that during one such discussion at the offices of Leveraged, McKay said that the trading programme manager was to be Scotside and that its principal was Mayman.  One or other of McKay, Steele and Burton said to Harle that Scotside and Mayman had much experience with such trading programmes and had previously conducted them successfully with IUCF and Tubman.  McKay said that the investment was to be paid to the trust account of Smith Barney, which firm was to hold the same in trust for Alianda, and was to be paid to Scotside's trading account in exchange for a guarantee to repay the investment one year and two weeks from deposit, such guarantee to be from a top 50 rated world bank (so rated by Moodys and by Standard & Poors) and that the guarantee was to be held by Smith Barney on trust for Alianda.  There was a conflict in the evidence as to whether Ms Harle and/or Mr Ozuslu were present at any of those meetings.  I accept their evidence that they were not.

1. Harle also testified that he asked McKay by telephone to provide a letter signed by a partner of Smith Barney evidencing the arrangement and, on 21 May 1995, received from McKay by fax a draft letter to be signed by a partner of Smith Barney.  Harle made alterations to the draft to make the release of the investment expressly conditional upon receipt of a guarantee from a top 50 rated world bank and faxed the draft back to McKay.  When Harle asked McKay in a phone call where the signed letter from Smith Barney was, McKay told him that the letter had not been signed by Smith Barney but that he had arranged with Tubman and Mayman for a guarantee from a top 100 ranked world bank (“a prime bank guarantee”).  McKay told Harle that the guarantee would come directly to the bank (not to Smith Barney) and the money would not be released from the trust account at Chemical Bank until the guarantee was received.

1. At one of the meetings at the office of Leveraged, Harle was told by McKay, Steele or Burton that there was a master contract between Leveraged, IUCF, Chemical Bank, Smith Barney and Scotside under the terms of which the prime bank guarantee would be provided and the trading programme operated  and he was also told that the terms of the master contract could not be disclosed to Alianda or other investors otherwise the trading programme would not proceed.  McKay had earlier advised Harle to the same effect.

1. On or about Wednesday 24 May 1995 Mr Ozuslu and Ms Harle decided that Alianda would make the investment in the trading programme.  This decision was made at a gathering at the Harle parents' home in Templestowe, where Harle discussed the proposed investment with the couple.  When asked for his view Harle told the couple that provided the bank guarantee was obtained the investment was secure, that he regarded the trading profits as possible rather than certain and that even if they did not get the trading profits their principal was at least secure.

1. Ms Harle deposed that, on the basis of what Harle said, she was satisfied that, as the principal was guaranteed, the worst that they could do was not receive the trading profit.  She deposed that she did not believe the trading profit was realistic; her belief was that it would be nice if they got some trading profit but she was not counting on it.  Ms Harle testified and I accept that she told Harle that the amount to be invested was a lot of money and that they would be relying upon him as their lawyer to ensure that the investment was legal and above board and that all of the "i's" were dotted and the "t's" crossed, and there could not be any risk that they could lose that $2 million. She deposed that Harle told her that he "understood it" and that to the best of his ability he had checked out the reputations of the people and all the legal documents and everything was in order and he did not see how they could lose.  A date was not put on this conversation but I am satisfied that it took place.  Ms Harle said that Harle provided her with some documents but that she could not now identify the documents and did not remember closely reading the documents.  She said that she relied on Harle’s explanation and his assurance to her that he would look after the transaction on their behalf and they could not lose the US$2 million.

1. Harle had had a previous discussion with Mr Ozuslu about his fees in connection with this investment.  Mr Ozuslu initially offered 20% of any profit earned.  Harle raised the subject at the 24 May gathering.  Ms Harle said that she was not prepared for Harle to be paid any more than 10% of any profit.  Harle accepted that.

1. The couple told Harle to proceed to arrange the investment for Alianda.  After the decision was made, Harle received by fax from McKay, on 25 May 1995, some documents which McKay had earlier received from Tubman.  One document was a letter to McKay dated 19 May 1995 on the letterhead of International United Charties (sic) Foundation USA signed by Tubman. Many features of this extraordinary letter, like a number of other documents provided by McKay or Leveraged, should have been sufficient to put a competent professional on his guard concerning the bona fides of this so-called investment proposal:

“  INTERNATIONAL

UNITED CHARTIES FOUNDATION, USA.

Branch Office:  Mailing Address:
174, Circular Road,  P.O. Box 1075,
Freetown,  Yonkers 10702-1075,
SIERRA LEONE.  NEW YORK, USA.

19th May 1995

Mr William McKay
Managing Director
Enterprise Funding & Investment Pty. Ltd.
15/188 Balaclava Road
Sydney NSW 2122
Australia     Fax thru' 612.888.6124

Dear Sir,

Re: Loan of US$2 million approved for I.U.C.F., USA/Ms. E. Nysietta Tubman

I am the Founding Director and sole Administrator of the above Charity which is Registered as a Corporation in Delaware USA under the Registration Code 209/1 – Tax Exemption Number 126-212.  I.U.C.F., USA was established in December 1990 with my own personal funds, the blessing of my country of Liberia, and has since received full support from the Church of Christ Harlem New York and the African American Institute, United Nations New York USA.  I.U.C.F. USA is a non-profit organisation that raises funds exclusively for the refugees of Liberia.
The funds that are raised by I.U.C.F. USA are used to purchase foodstuffs, clothing, medical services and to educate the numerous children in homes and orphanages in and out of Liberia.  There are a number of education programs in existence at present as a result of funds raised by I.U.C.F. USA.
In my capacity as a Counsellor at Law, I am also the authorised Trustee to sign on the accounts of I.U.C.F. USA both in the USA and Switzerland.
Thank you for the loan which you have arranged for the foundation, Banking co-ordinates are enclosed.  Your lender's funds are received into these Trust accounts that have been made available by the Banks and under instructions from the Lender and I.U.C.F. USA the Banks are not permitted to release the funds until a Bank Guarantee from a top 100 world Bank has been issued for the funds and they have authenticated same.  I will personally oversee this procedure and will only sign the release for the funds when I can guarantee in my capacity as an Attorney that your Lenders capital has been secured without risk.
Your Lender's will receive interests and profits equal to their capital loan investment after the first four (4) weeks of trading and then each four (4) week period thereafter for a period of forty (40) weeks over a twelve (12) month period (this is allowing for Public Holidays and down time in Trading Dec/Jan each year). 
The initial capital loan investment is US$2 million and the return is 0.5% per week for forty (4) weeks.
All payments are made direct to your Lender's every four (4) weeks in arrears by Bank Endorsed Payment Order from I.U.C.F. USA's Bank so your Lender will need to complete the enclosed Pay Order so that it can be lodged at the Bank for endorsement immediately funds are lodged with the Program Manager and trading commences.
I trust that I have given you enough comfort for your Lender's to participate in the Program.

Yours faithfully,

E. NYSIETTA TUBMAN,
Counsellor at Law,
Notary Public R.L.

Missionary Work in Liberia P.O. Box 1743 Manhattansville Station New York N.Y. 10027 U.S.A.”

1. A further faxed document was a “Deed of Assignment and Memorandum of Understanding”.  This document contained a number of recitals about IUCF including one which said that IUCF had as patrons “a number of Security Traders and their Banks who are experienced in the Management of the Secondary Security Market, trading Bank Instruments for Profit” and another which said that “IUCF has agreed to pay to the Investor the sum of US$500,000 per week for Forty (40) weeks…”.  The body of the Deed contained the following clause:

“1.      The Investor shall within Twenty Four (24) hours of execution of this agreement pay the Investment Principal to the Bank account of IUCF described in the Schedule by Conditional Swift Wire transfer.  Such Wire transfer shall be generally in accordance with Annexure 'A' hereto and shall be expressly subject to the provision to the Transferor Bank on behalf of the Investor of

(a)an unconditional, irrevocable guarantee from a top One hundred (100) world ranking Bank hereinafter called a 'Prime Bank' in favour of the investor, guaranteeing the repayment of the Investment monies by IUCF on the expiration of One (1) year and Two (2) weeks from the date hereof.

(b)a Pay Order generally in accordance with Annexure 'B' hereto to the Investor's Bank account described in the Schedule from IUCF and endorsed by a Prime Bank.

Upon provision of the Guarantee and Pay Order described in sub-paragraphs (a) and (b) the Investment Principal shall be released to or to the order of IUCF.  IUCF shall provide such Guarantee and Pay Order within Two (2) days of payment by the Investor of the Investment Principal."

1. Another faxed document was an "Irrevocable Corporate Master Payment Order" signed by Tubman full of strange terminology and spelling errors.  This document spoke of the return of one half of one percent per week for 40 weeks on a sum of US$100 million (apparently the “leveraged” amount), yielding US$2 million every four weeks for 40 weeks – ie a total of US$20 million - and contained the following clause:

“i/we, the undersigned hereby guarantee with full corporate responsibility and authority to, upon receipt that the investment funds have been deposited to the account of scotside international (aust.) group in respect to the above transaction, pay to the beneficiary named herein within the first four (4) weekly period after lodgement of the investment funds, the entitlement stated above.”

1. Another faxed document was a “Speciman (sic) Conditional Cash Backed Swift Wire Text”.

1. In anticipation of Alianda's decision to proceed with the investment Harle had been in contact with a bank officer (Skien) of the ANZ Bank at Templestowe regarding the transfer of US$2M to the USA.  After receiving instructions from Alianda, Harle spoke to Skien on Thursday 25 May 1995 to arrange for part of Alianda's term deposits to be repaid and was told that Alianda's funds would be available for transfer on Friday 26 May 1995.

1. On Friday 26 May 1995 at 1.29 p.m.  Harle received by fax from McKay the Chemical Bank account number for Smith Barney and other details, which were described as “co-ordinates” in a letter from Scotside.  That letter said, inter alia, that “no contact is to be made to Bank or Bank officer without authority otherwise, Transaction will be cancelled and funds returned.”

1. Harle received the above together with a further letter from Scotside dated 26 May 1995  which set out the procedure and which said, inter alia:

“Within 24 hours of the receipt of the Funds being posted in the Account at Chemical Bank, a Guarantee will be forwarded to your Issuing Bank covering the Invested amount transferred and after this Guarantee has been forwarded by the Bank, the Program will commence no later than 48 hours after this and the Yield will be paid on a four weekly basis which is 3 days after each four weekly period.

I am forwarding a copy of this letter to Leverage Equity people, as I have no intensions (sic) of accusations of circumvention, although your call was cleared by M/s Esther Tubman on Leverage's behalf.”

1. McKay told Harle by telephone, after he had received the fax, that the reference “MRC/SCOT/ENT/1004A” was a reference to the master contract for Alianda's transaction.  The letter dated 26 May 1995  stated that the money had to be paid that day. On that day at about 2.00 p.m. Harle delivered, to Skien at the ANZ Bank, copies of the deed of assignment and memorandum of understanding dated 23 May 1995 and the letter from Scotside which provided "the co-ordinates".  Skien told Harle that he would need to make arrangements with the international section of the ANZ Bank at Box Hill and said that he would call Harle to make arrangements for the couple and Harle to come in later in the day to the Templestowe branch of the ANZ Bank.

1. Skien called Harle later in the day and made an appointment for 4.30 p.m. at Templestowe.  Mr Ozuslu, Ms Harle and Harle went into the bank at 4.30 p.m. and were there introduced to another bank officer.  Skien was also there.  The newly introduced bank officer told Harle the following (or something along these lines with emphasis on the possibility of a "scam"):

-               that it was likely that the whole thing was "a scam" (or he was concerned that it may be a scam) and that there were a lot of them on the international scene floating around;

-               that the ANZ Head Office thought that the trading programme may be a scam;

-               that the bank was not prepared to transfer the investment monies.

1. Harle asked to see a long fax printout which the bank officer was holding which the officer said that he had received from the ANZ Head Office in relation to the documents Harle had earlier given to Skien but the officer would not show the fax to Harle.  Harle said to Skien and the other bank officer that the transfer was to be subject to a bank guarantee.

1. While they were all still in a room at the ANZ Bank, Harle phoned McKay by mobile phone and repeated to McKay what the ANZ bank officer had told him.  McKay said that he would contact Tubman and Mayman. McKay telephoned Harle back approximately 10 minutes later and told Harle that he had explained what had transpired to both of them and McKay told Harle that they had said to him that the banks were jealous of what they called outsiders being involved in trading programmes and that the ANZ Bank did not want to lose control of deposits with it.  Harle told McKay that he was most concerned about the suggestion that the trading programme might be a scam and wished to speak to Tubman and Mayman.  I find that McKay gave to Harle both Tubman's and Mayman's telephone numbers in New York and Sweden respectively and suggested that Harle ring them. Harle noted the numbers on the inside of his file cover. Harle phoned Tubman who assured Harle that the trading programme was genuine and that the money was at all times protected and also personally guaranteed by her.   Harle phoned Mayman and had a similar conversation and Mayman said that the ANZ Bank was jealous and not wanting to lose the money which is why the bank would be causing the problem.  Mayman said to Harle that Alianda's investment was at all times secured, that the terms of the agreement with IUCF would be performed and that his securities trader, Cox, was most honest and competent and would also ensure that Alianda's investment was secure and that the trading programme would be effected efficiently.

1. By this time it was after 5.00 p.m. and the ANZ Bank officers continued to refuse to take any action and told Harle that, in any event, there could be no transfers so late in the day. Harle told the bank officers that he would think about what had been said.  I find that Harle said to the couple after leaving the ANZ bank (as Mr Ozuslu testified): “They are jealous, they don’t want your money to be moved from there…they are not [an] internationally minded bank.”

1. They all left the bank and went back to the couple's home.  Harle then phoned McKay and told him what had happened.  McKay said that he had contacts with Citibank and he thought they might be able to make arrangements through that bank.  McKay said that he would make enquiries and get back to Harle. Harle told the couple that he would make more enquiries about the scheme and that McKay had said that he would do so as well.

1. McKay phoned Harle later on Friday night and told Harle that he had spoken to one Jordan from Citibank, North Sydney, and explained the need to transfer US$2 million and that he had arranged to collect an application for an international payment order from Citibank at North Sydney and that he had an after hours phone number to make contact over the weekend with a person he knew from Treasury in Citibank, Sydney, one Hogan.

1. On the evening of Friday 26 May 1995, Harle returned to his farm in the country and, on the way, spoke to McKay by telephone and asked him to get written confirmation about the procedures and information about the parties because they had become concerned as a result of what the ANZ bank had said about the trading programme.  McKay said that he would attend to Harle's request.

1. On Saturday 27 May 1995 McKay telephoned Harle and told him that he had discussed the proposed transfer with Hogan who told him that Citibank would be happy to act as Alianda's banker and effect the transaction.  McKay also told Harle that he had spoken to Tubman, Mayman, Steele and Burton and had arranged that the prime bank guarantee would be from a top 25 world ranked bank and that the prime bank guarantee would also secure the payment to Alianda of interest at 8% per annum.  McKay said that he would fax a letter setting out all of the procedures when it was signed by Steele.  On 27 May 1995 McKay faxed to Harle a copy of a fax from him to Mayman dated 26 May 1995 concerning the dealings with the ANZ Bank. Harle also received by fax from McKay a copy of a letter dated 26 May 1995 from Scotside signed by Mayman and addressed to McKay which stated in part:

“Re     special investment program.

I am in receipt of your letter dated the 27^th May 1995 and because of the time difference I am writing to you the day before the date of your letter.  Do not tell the Bank this otherwise they will be saying we are fraudulent and back dating our correspondence, because they would not understand what a time span was.

I congratulate you on your ability and that of your Solicitor to out-weigh the nasty Bank people whom will have egg on their face when they see the results that is if ever your Client uses them again.

From the paperwork which you so kindly forwarded to me, I can understand the reluctance that the Bank had shown in releasing the Funds from the Term Deposit Account prior to the maturity date.  However they could have been more gracious about it, anyway that is how people re-act when something is taken away from them.  The important thing now is to allow us to complete all the necessary paper-work to ensure that the Guarantee is given within 24 hours and as I advised you before for the program to start within 48 hours of this occurrence. 

I have spoken with our Asset Manager and the Trading program Bank and we discussed the problems which you experienced and it was agreed by all, that providing that Funds are in the Account for commencement of business on Tuesday morning in New York, USA, we will honour our commitment that this amount of $2 Million USD and the $4 Million to follow will be paid the yield at the agreed rate. 

I believe that you would call this recognition of a job well done under extreme difficulties in dealing with difficult Banking people, and do not let us forget people doubting the ability to perform, which as far as I am concerned gives me the enthusiasm to prove them all wrong without talking to them.  I believe that action speaks greater than words…”

1. At 7.00 p.m. on 27 May 1995 Harle received, by fax, a letter from McKay which read as follows:

"Dear Matt,

Re: Pending US$2 million transaction with Jenni and I.U.C.F., USA

Further to our telephone conversations today I now advise the following after confirmation with Esther Tubman, Colin Mayman and Shaun Hogan at Citibank in Sydney.

1.The funds are Express Wire Transferred to the coordinates on the contract.  The Smith Barney Inc. account is their clients Security House account with Chemical Bank New York.  Smith Barney Inc. have issued instructions to Chemical Bank that on arrival of the funds they are to be further credited to account number and account reference nominated on the coordinates that have been issued exclusively for this transaction.

2.This further account is the Programme Manager's/Attorney's Bonded (Insured) Trust Account.  There are Three Trustees to this account, Colin Mayman, Robin Cox and Esther Tubman and they are bound by the Master Contract with Smith Barney to do certain things in relation to this account.  The main instruction to both the parties, Smith Barney and the Bank Officer in charge of this account is funds do not move out of the account until a Bank Guarantee from a Top 25 World Bank is in place and has been authenticated and despatched to the Lender's Bank (ie Citibank Australia).  While the funds are in the care of Smith Barney's account or the sub-account they are bonded (insured against fraud or defalcation by any of Smith Barney's, Chemical's or the Programme Manager's staff).

3.On despatch of the funds by Citibank Australia the receipt must be faxed to Colin Mayman so that he can advise the Account Manager Mr Bill Sanders at Chemical Bank to expect them.  Mr Sanders is then legally bound to follow the instructions given by Smith Barney and the Programme Manager and as per the Master Contract lodged with the Bank the funds are released.

4.You are requested to make sure that Citibank Australia gives you all the Bank codes that have been applied to the transfer of the funds so that we are able to let Chemical Bank know if there are any delays in the remittance so they can chase it up from their end.

5.I have an appointment with Ms. Rosemary Palmer of Citibank Gold accounts (that is account holders over AU$1 million) at 9.00 a.m. on Monday 29th May to explain the situation to her in regard to an account for Alianda Close Pty. Ltd. in Melbourne and for them to complete the transfer of the funds for you.  I will advise you from the Bank who you are to see and what they expect you to get from the A.N.Z. for the transfer of funds.  You will then have your own Private Banker with Citibank who will issue you with Cheque Books Credit Cards etc.

6.Your funds will be secured from the moment they leave Australia via Smith Barney, Chemical and the Bank Guarantee which will come back to Citibank Melbourne.

7.I will negotiate with Esther tonight in regard to a Promissory Note for the returns.  I will also ask my man at Citibank Sydney about the chances of discounting this for you and what the discounted rate would be.

I hope this gives you all a little more comfort.

Regards [signed by McKay]

I Kenneth M. Steele of 17, Stanley Street, Tranmere, South Australia hereby state that I have personally met with Mr Colin Mayman of Scotside International (Aust.) Groups, Ms. Robin Cox, US Federal Reserve Trader in New York and Ms. Esther Nysietta Tubman Attorney and Trustee of I.U.C.F. USA and are of the opinion and have evidenced that all parties are capable and proficient in the progammes that they are operating in regard to our transaction(s).  I have been privileged to have been introduced to both Smith Barney Inc. and The Bank Officer at Chemical Bank in New York and I am confident that they will be operating to the instructions that have been given them in the Master Contract especially in relation to your funds.

I am also a Director of Leveridged [sic] Equity Investments Pty. Ltd. of Melbourne who hold a contract with Scotside International (Aust.) Group.  The above comments are true and correct and are given in all good faith.

Yours sincerely
_____(s)___________  _______(s)__________
Kenneth M. Steele  Witness

Director."

1. Harle testified that this letter was the one which finally gave him sufficient comfort to recommend that Alianda proceed with the investment. Later that evening Harle sent a copy of the letter to the couple by fax and discussed the matter with Mr Ozuslu by telephone. 

1. Ms Harle testified and I accept that on Saturday 27 May 1995 Harle told them that he had spoken to McKay, that McKay was a banker with long experience in the banking system and that McKay was able to pull out this person from Citibank over the weekend who would "make it all happen".  Harle said that the "ANZ Bank did not know what they were talking about" and that McKay had assured him that everything was alright and that McKay was somebody they could rely upon.  Harle also said that he had carefully examined all the relevant documents and had made enquiries of Tubman, Mayman, Burton and Steele.  As a result Harle said that he was satisfied that the investment was bona fide.  He also told them that he would be able to obtain guarantees from Burton and Leveraged to further secure the advance.  Ms Harle said that there were a number of telephone conversations with Harle on the Saturday.  Whether what Harle said was said to Ms Harle, or is hearsay relayed through Mr Ozuslu, Ms Harle did not make clear although she suggested that she and Mr Ozuslu “swapped the phone” between them.  Harle said to Mr Ozuslu that he would seek a guarantee from Leveraged and Burton and on that basis Mr Ozuslu said that Alianda would transfer funds to Citibank and proceed with the trading programme.  Harle then told McKay of Alianda's decision and requirements.  Harle testified that he believed the investment was genuine and that, if he had thought otherwise, it would not have gone further at that time.  Mr Ozuslu left for Turkey by Gulf Air at about 1.40 a.m. on Sunday morning.

1. On Sunday 28 May 1995, after Mr Ozuslu had left for Turkey, Harle spoke to Ms Harle who told him that she wanted him to put his advice in writing.  Harle swore and I accept that he prepared a letter dated 29 May 1995 addressed to Alianda (which was typed by his wife) and that he gave this to Ms Harle on the morning of 29 May 1995.  Ms Harle said that she received the written advice for which she had asked although she was unable at trial to  produce the original letter which she received. I accept her evidence that she did receive it and I am satisfied that she received it that Monday morning.  Harle had opened a file at his office on 20 May 1995 (file no. 814) and retained a copy of the letter on this file.  The letter bears the file number as his reference.  The file copy of the letter read as follows:

"D.J.M. HARLE LL.B CPA  Solicitor

___________________________________________________________________
Princes Highway (P.O. Box 16), Nicholson, Vic. 3882.  Tel [phone] Fax [phone] Branch Office: (By appointment only). 105 High Street, Doncaster, Vic. 3108 Tele/Fax [phone]
___________________________________________________________________

Please reply to Nicholson office.               Your Ref:       My Ref: DJMH:814

29th May, 1995.

The Directors,
Alianda Close Pty. Ltd.,
45 Serpells Road,
TEMPLESTOWE  3106.

Dear Mesdames,

Re: Investment – United International Charities Foundation

I refer to our recent communications and to the documents provided to me in relation to same and confirm that I have examined the documents, have made enquiries of William McKay, Esther Tubman, Colin Mayman together with representatives of Citibank and advise that, on the basis of such examination and enquiries, I am satisfied that the investment proposal is bona fide and believe that you should proceed with same.

I have made clear to the parties I have spoken to that, through me, the company is entering into the investment in reliance upon their representations and, in such circumstances, the parties can be held responsible for any loss reasonably foreseeable as a consequence of such representations.  I also understand that guarantees are available from Evelyn Burton and Leveraged Equity Investments International Pty. Ltd. and recommend that these be obtained.  Finally, I also recommend that the wire transfer of funds to the account in the agreement be expressed to be conditional upon the terms of the master agreement between Smith Barney Inc, Chemical Bank and IUCF.

I will attend to the above recommendations prior to payment of investment monies.
  Yours faithfully,
  D.J.M. Harle."

1. Also on the Sunday, McKay told Harle that he would be sending a draft international payment order and that it included words which made the payment subject to the master contact which would have the effect of ensuring that the transfer of funds was conditional upon Alianda receiving a prime bank guarantee.  McKay told Harle that arrangements were in place with Citibank in Sydney to enable Alianda to open an account with Citibank in Melbourne on Monday 28 May 1995 and arrange the transfer. Subsequently that day, at 11.44 p.m., Harle received an application for international payment order in draft from McKay.  McKay also faxed a draft guarantee for execution by Leveraged and by Burton personally. (The guarantee was later executed.)

1. Shortly after midnight,  Harle received by fax from McKay a final draft of the Deed of Assignment and Understanding between Alianda and IUCF and a copy of the same was also sent by McKay to Ms Harle for execution by Alianda. At 11.50 a.m. McKay faxed to Burton the same document executed by Tubman and IUCF. McKay's  fax to Burton was couched in terminology revelatory of his state of mind:

“Hi there mate,

Matt & Jenny will be calling you soon to come and pick this up and sign it.  You can witness it.

They will also pick up your hard copy letter to Alianda Close Pty. Ltd.  The lady that they are to see at Citibank Gold Priority Banking at Level 26, 101, Collins Street, Melbourne is Ms. Julie Thomas Telephone No. 653. 7330.

They should have organised the A.N.Z. shitheads to have issued a Bank Warrant to their Branch nearest to Citibank Melbourne, 185, William Street, Melbourne.  A.N.Z. where ever then has to walk the warrant hard copy to Citibank, William Street.  It has to be issued in favour of Alianda Close Pty. Ltd & Citibank for AU$3 million.

Matt has the coordinates with him for Chemical Bank and Julie will organise that for them when they see her. It’s nearly Moet time.  ‘I’d like to see that.’”

1. On Monday morning 29 May 1995, Roy Harle, Harle and Ms Harle went to the offices of Leveraged in Collins Street where they saw Burton who said to them that the proposal was a genuine investment programme and she had been involved in many such programmes  She gave them a written guarantee. It would seem that at this time Ms Harle must have signed (or handed over) the so-called Deed of Assignment and Understanding on behalf of Alianda.

1. Either before or after the visit to Leveraged, the three of them  collected a warrant for a transfer of the funds from the ANZ bank at an ANZ branch in William Street  and then went to the branch of Citibank also in William Street. Possibly there were two visits to Citibank. At Citibank they met various bank officers.  There was a discussion for about an hour.  During that time It was explained to them that they would be a member of the Citibank "Gold Club" and that they would have a personal banker at Citibank.  Arrangements were made for A$3 million to be deposited with Citibank. Then on behalf of Alianda, Ms Harle signed an application for an International Payment Order to transfer US$2 million to the USA.  The application included the following particulars:

"Beneficiary – Smith Barney Inc; Account No 066-198-038

Beneficiary's bank – Chemical Bank, New York

For Attention:  Bill Sanders

Further credit to 557-00759-10

Subject to Master Reference Contract MRC/SCOT/ENT/1004A"

1. On 31 May 1995 Ms Harle was told by Harle that the money had not been transferred "because of the interference of the ANZ Bank" and that she would need to go into Citibank to sign a further document.  The Application for International Payment Order  was amended including as follows: the parties were the same but it was now for the attention of "Todd Pescan" and the master reference contract particulars were slightly altered.

1. On 5 June 1995 Ms Harle was again told by Harle that there had been a problem with the settlement of the investment and she and Roy Harle attended at Citibank and signed another application for an International Payment Order. This time "Dean Witter Reynolds Inc" was substituted for Smith Barney with other apparently consequential changes.

1. On 13 June 1995, again at Harle's request, Ms Harle signed a further amended Application. This time Dean Witter Reynolds Inc was substituted by "Haines Morgan & Co" and Chemical Bank, New York was substituted by "Comerica Bank & Trust Co of Florida" with further apparently consequential changes.

1. By letter dated 13 June 1995 Harle wrote to Citibank, using his solicitor's letterhead, stating the following:

“re:     Alianda Close Pty Ltd

I refer to our telephone conversation of today and confirm my advice to you that, due to interference from the ANZ Banking Group Limited as to the propriety of the funds of Alianda Close Pty Ltd, the funds recently remitted to your New York office are yet to be applied for their intended purpose.

I am personally able to warrant to you that the funds are from clear, clean and non-criminal sources and represent some of the proceeds of realization of assets of the family of my sister and her husband in Turkey.  These assets were accumulated over the past twenty-five (25) years from the trading activities of a group of companies trading in the tourism industry, Turkey and presently employing approximately 3,500 people.  My brother-in-law has been, and remains, a principal director of such companies.  The family has, over the past two (2) years realized some of its Turkish assets and remitted such funds to Australia where my sister, niece and nephew now permanently reside and where my brother-in-law intends to permanently reside in the near future.

In early, 1994 the family transferred approximately $US1. million Australia from realization of assets and these funds were, for the large part paid into an account with the ANZ Banking Group Limited at Templestowe to the Trustee of the OZ Family Trust.  The source of the funds was known to the ANZ Banking Group Limited which raised no objection as to its propriety.  In March of this year, in my capacity as a Solicitor and upon the request of my sister and my brother-in-law, I spent a week in Turkey advising on and assisting in negotiations for the sale of some of the family’s equity in the group of companies and, upon the successful completion of such negotiations arranged for $US3,400,000.00 being the consideration for sale of the equity in the group of companies, to be paid to the account of the Trustee of the OZ Family Trust (now Alianda Close Pty Ltd) with the ANZ Banking Group Limited at Templestowe.  These funds were received by the ANZ Banking Group Limited with knowledge of the source of same and without protest as to the propriety of same in March of this year.  The balance of such funds are still held on Term Deposit with the ANZ Banking Group Limited until the 29^th June, 1995.

I attach a further Application for International Payment Order for same day payment with different payee particulars and co-ordinates and would be pleased if you would arrange for the sum of $US2. million presently held by Citibank Inc.  in New York to be re-directed in accordance with the Application.  In view of the history of this matter I would be pleased if you would also certify on the transfer that the funds are ‘clean, clear funds legally earned’.  I am prepared to, and hereby indemnify and keep Citibank indemnified against any loss it may suffer as a consequence of such certification.”

1. Ms Harle testified and I accept that in relation to the various changes to the applications which she had signed  that she relied on Citibank and Harle to ensure that Alianda's interests were being looked after.

1. After the final transfer on 13 June 1995 Harle told Ms Harle that the money had been successfully transferred and did not tell her that there was any problem.

1. On 15 June 1995 Ms Harle signed, at Harle's request, the following memorandum which was addressed and sent to Citibank:

"  BY FACSIMILE

TO:  CITIBANK LIMITED

ATTENTION:  VIVIENNE PAPAGEORGE

No. 03 6706807   or   03 6702610

FROM:  JENNY HARLE for ALIANDA CLOSE PTY. LTD.

MESSAGE:  THIS TRANSMISSION IS TO CONFIRM THAT MY SOLICITOR D.J.M. HARLE AND WILLIAM STANLEY McKAY ARE AUTHORISED BY ALIANDA CLOSE PTY. LTD. TO ENQUIRE OF YOU AND RECEIVE ADVICE FROM YOU AS TO THE TRANSFER OF THE COMPANIES FUNDS OVERSEAS.

…………………………

JENNI HARLE

For and on behalf of ALIANDA CLOSE PTY. LTD."

1. On 22 June 1995, Harle told Ms Harle that a guarantee had not been received but that an insurance bond had been received and he said that that was acceptable and that everything was proceeding as it should.

1. About a month after the transfer of funds, Harle told Ms Harle that there had been some hold up with "the payments".  She was told stories about delays and of problems by Harle for a number of months but as each delayed payment date arrived, no payment was received.

1. It was not until August 1995 that Harle told Ms Harle that there was some problem with the payments, but he was still expecting that they would be made.

1. Ms Harle deposed that Harle continued during this period to ask for money on account of costs from her and told her that he was working very hard on the case on their behalf and they paid him the money as he requested for his work from time to time.

1. The funds "invested" were lost.  The couple were told in due course that the FBI was investigating the transaction and then ultimately that persons in the USA were charged with fraud arising out of the transaction.

1. In October 1998 Harle gave evidence as a witness for the prosecution in a trial in New York of persons including Mayman and Cox on charges relating to the defrauding of Alianda.  The following relevant questions and the answers of Harle from the transcript of that trial should be noted:

Q:       What kind of work do you do?

A:       I’m a lawyer and accountant.  (Page 82)

Q:Can you tell us a little bit about the requirements for becoming a lawyer in Australia?

A:On completion of the university degree, it is necessary to do a minimum of one year training in the legal field under supervision, then meet educational requirements of the admission board and then be admitted by order of the state Supreme Court.

Q:Have you completed those requirements?

A:Yes.

Q:I think you mentioned you are also an accountant.

A:Yes.

Q:How did you qualify to become an accountant?

A:Partly through training at university and partly postgraduate training with the Australian Society of Accountants.

Q:Do you work for yourself or do you work in a firm of some kind?

A:I work for myself.

Q:Would you tell us a little about your business?

A:It’s generally financial advice, contract disputes, dealing with bankruptcy related matters, and essentially try to keep people out of financial trouble and solve disputes.

Q:In connection with this work you have described, are you a member of any professional organizations or associations in Australia?

A:Yes.

Q:What are those?

A:The Law Institute of Victoria and the Australian Society of Certified Practising Accountants.  (Pages 83-4)

Q:In May of 1995, what kind of role did you play with regard to Alianda?

A:Again, I gave general business advice and financial advice from time to time.

Q:Tell us what kinds of financial advice you provided to Alianda.

A:Specifically, looking at various investments that Alianda was considering to make on behalf of the Oz Family Trust.

Q:When you did this, when you were looking at different business investments that Alianda might make what were the kinds of things that concerned you?

A:Principally security to see that the capital wasn’t lost, and secondly, looking for a good rate of return.  (Pages 87-8)

Q:And what were you going to receive if the investment was successful?

A:Ten percent of any profits that were made.

Q:Who chose 10 percent?

A:My sister.

Q:What was the reason your sister was going to give you 10 percent?

A:She saw I was entitled to something for my efforts.  (Page 126)

Q:Are you the attorney for the company?

A:Yes.

Q:How long have you been the attorney for that company which is a trustee for the Oz Family Trust?

A:I have provided legal and financial advice for the trust since 1980 when it was established.

Q:Would it be fair to say that you have done it continuously from 1980 up until 1995?

A:Yes.

Q:Were you paid for your services?

A:No.

Q:Never been paid?

A:No.”  (Page 356)

The plaintiff’s allegations of negligence against Harle

1. By its second amended statement of claim the plaintiff’s allegations against Harle were as follows:

“Breach of Solicitor’s Retainer

17.In or about May 1995, the plaintiff and the solicitor entered into an agreement (‘the retainer’) under which the plaintiff retained the solicitor to advise with respect to and effect the investment.

Particulars

The retainer was oral and consisted of conversations between the solicitor and the directors of the plaintiff in May 1995 the substance of which were that the solicitor suggested that the plaintiff make the investment which was in essence:

(i)the plaintiff would lend US$2,000,000 for a 40 week period;

(ii)the repayment of the principal loan would be guaranteed by a world ranked top 25 bank;

(iii)the plaintiff would receive $500,000 per week interest for the money.

The solicitor’s recommendation was accepted on behalf of the plaintiff and he was requested to act on its behalf in making the arrangements for the investment.

…

18.      The terms of the retainer included the following:

(a)       the solicitor would advise with respect to the investment;

(b)the solicitor would effect the investment on behalf of the plaintiff;

(c)the solicitor would exercise reasonable care and professional diligence in advising the plaintiff with respect to the investment; and

(d)the solicitor would exercise reasonable care and skill and professional diligence in effecting the investment on behalf of the plaintiff.

…

19.Pursuant to the retainer, the solicitor advised the plaintiff to proceed with the investment.

Particulars

The advice was partly in writing and partly oral.

The written part consisted of a letter from the solicitor to the plaintiff dated 29/5/95.

The oral part consisted of conversations between the directors of the plaintiff in May 1995 and the solicitor, the substance of which was that the investment was an excellent return, the plaintiff could not lose the capital of US$2,000,000 and the sorts of returns contemplated in the investment did occur.  Jennifer Harle told the solicitor that:

(i)        the investment involved a lot of money;

(ii)       the transaction had to be above board;

(iii)      all of the ‘i’s’ had to be dotted and the ‘t’s’ crossed;

(iv)there could not be any risk that they would lose the US$2,000,000.

The solicitor said that:

(i)the plaintiff would not lose the capital;

(ii)he had checked out the reputations of the people involved; and

(iii)the legal documentation was in order.

20.On or about 13/6/95 the solicitor arranged for the US$2,000,000 to be transferred in accordance with the investment but did not receive the bank guarantee ensure that the transfer was conditional upon a bank guarantee being received prior to any release of the funds from the beneficiary’s account.

…

21.In breach of the retainer the solicitor did not exercise reasonable care and skill and professional diligence in:

(a)advising in relation to the investment;

(b)effecting the investment on behalf of the plaintiff;

(c)the solicitor would exercise reasonable care and professional diligence in advising the plaintiff with respect to the investment; and

(d)the solicitor would exercise reasonable care skill and professional diligence in effecting the investment on behalf of the plaintiff. 

Particulars

(i)Advising that the plaintiff would not lose the capital, when there was a real risk that the capital would be lost.

(ii)Failing to properly checked out the reputations of the people involved.

(iii)Recommending the investment without an adequate understanding and without making adequate enquiries as to the persons involved.

(iv)Failing to properly advise about the loan documentation.

(v)Failing to ensure that the first defendant obtained the bank guarantee prior to allowing the funds to be transferred any release of the funds from the beneficiary’s account.

(va)Failing to ensure that the funds were transferred conditionally upon a bank guarantee being received prior to any release of the funds from the beneficiary’s account.

(vi)Failing to ensure that the terms of the bank guarantee adequately protected the capital.

22.As a result of the breach of the retainer by the solicitor, the plaintiff has suffered damage.

…

Breach of Solicitor’s Duty of Care

23.     Further, at all relevant times:

(a)the solicitor knew or ought to have known that the plaintiff relied upon him to exercise reasonable care and skill in: 

(i)advising about the investment; and

(ii)effecting the investment.

(b)the plaintiff did reasonably rely on the solicitor exercising reasonable care and skill in:

(i)advising about the investment; and

(ii)effecting the investment.

…

24.In the circumstances, the solicitor was under a duty to exercise reasonable care and skill in:

(a)advising about the investment; and

(b)effecting the investment.

25.In breach of its duty of care did not exercise reasonable care and skill in:

(a)advising about the investment; and

(b)effecting the investment.

…

26.As a result of the breach of the solicitor’s duty of care the plaintiff has suffered damage.”

Third Party Pleadings

1. Harle filed an amended statement of claim in the Third Party proceeding on 13 February 2001.  To that pleading, the insurer filed a further amended defence dated 14 February 2001.

1. Paragraph 1 of the statement of claim alleged that Harle had at all relevant times been engaged in practice as a solicitor in the State of Victoria.  The insurer denied that allegation and said that Harle at all material times was engaged by Alianda to give general business advice and financial advice from time to time and was an accountant and a member of the Australian Society of Certified Public Accountants. 

1. The insurer admitted that it was a body able to be sued under the Legal Practice Act 1996 and that Harle and the insurer were parties to an insurance policy pursuant to which the insurer agreed to provide Harle with professional indemnity liability insurance for the year 1999 upon the terms and conditions of the policy.

1. The insurer further admitted that the insurance policy contained terms that the insurer would indemnify Harle against any civil liability in connection with his legal practice in respect of a claim under or circumstances reported within the period of insurance and would indemnify him against defence costs for any claim.

1. Paragraph 5 of the statement of claim alleged that Alianda’s claim against Harle was for civil liability in connection with his legal practice and was a claim made during the period of insurance.  Particulars thereto stated that the claim arose “out of a retainer of Harle, as a solicitor, by Alianda under which Alianda retained the solicitor to advise with respect to and effect the investment, referred to in paragraph 4 of the plaintiff’s statement of claim”.  The insurer denied the substance of those allegations and repeated what it said in answer to paragraph 1.

1. The insurer admitted that it had refused to indemnify Harle.

1. Paragraph 6A of the statement of claim said that on 13 February 2001, Harle compromised the claims of Alianda and Citibank against him accepting, by written terms of settlement, an obligation to pay Alianda the sum of $A1.5M in exchange for releases from Alianda and Citibank.  The insurer admitted the existence of terms of settlement (albeit in slightly different terms) but said that it was not “bound” by the terms of settlement on the grounds set out thereunder.

1. The grounds relied upon by the insurer were first that the terms of settlement were not reasonable and not entered into by Harle in good faith.  Particulars given of this allegation were, inter alia, that no reasonable consideration had been given to the reasonableness of the sum of $A1.5M but he had simply chosen the sum which equated to the limit of liability under the insurance policy; he had not had regard to the proper interests of the insurer; the settlement sum did not reflect a reasonable evaluation of the prospects of a successful defence to Alianda’s claim; he had no means or intention of paying himself; he had entered the terms for extraneous reasons such as to protect his personal reputation, to avoid adverse publicity and to avoid a family dispute; he was the beneficiary of a trust of which Alianda was trustee and was eligible to receive a portion of the settlement sum; and the terms were not an arm’s-length transaction having regard to the relationship of the parties and various other circumstances.

1. Second, the insurer said that the claim did not fall within the cover of the policy.  Third, the insurer said that Harle had settled without the prior consent of the insurer in breach of clause 36 of the insurance policy.

1. Finally, the insurer relied upon a defence the essence of which was the alleged dishonesty of Harle but which, because of the emphasis placed upon it, should be set out at some length:

“9.      Further, the third party says that there were terms of the insurance policy, inter alia, that:

(1)any insured who –

(a)committed; or

(b)permitted (whether knowingly or recklessly) -…

(ii)the making of a representation (including, but not limited to, a representation by way of a certificate, or acknowledgment or other document) which was known at the time it was made to be false;

(iii)dishonesty or a fraudulent act or omission – would indemnify the third party against any amount payable by the third party in respect of such witnessing, representing, dishonesty, act or omission (clause 15);

(2)the insurer would not indemnify any insured against any liability (or defence costs) as follows. …

21.Arising from an express warranty, guarantee indemnity or other contractual undertaking to the extent that –

(a)it extends a duty of any insured beyond exercising the standard of care and skill reasonably to be expected in the circumstances; or

(b)it increases the compensation or damages for which any insured is liable for breach of duty beyond the amount payable in tort –

(clauses 16 and 21);

(3)the third party would not indemnify any insured against any liability (or defence costs) as follows. ...

22.Arising, in whole or in part, directly or indirectly from, or brought about by –

(a)the dishonesty or fraudulent act or omission of any insured on or before 31 December 1997...

(clauses 16 and 22).

10.      The plaintiff alleged in its Statement of Claim that:

(a)Harle had given advice to the plaintiff which was partly in writing and partly oral; and

(b)insofar as the advice was in writing, it was constituted by a letter dated 29 May, 1995 (‘the letter’);

(c)insofar as the advice was oral, it was constituted by a conversation between the director of the plaintiff and Harle during which Harle said that –

(i)the plaintiff would not lose the capital;

(ii)Harle had checked out the reputations of the people involved; and

(iii)the legal documentation was in order –

(‘the oral statements’).

10A.The plaintiff by its director Jennifer Harle and her husband Sabit Ozuslu have given evidence that the second defendant advised them between 5.00 pm on 26 May, 1995 and 11.00 pm on 27 May, 1995 that:

(a)he had made enquiries with Mayman and Tubman and Citibank representatives;

(b)after making such enquiries he was satisfied that the investment scheme was genuine and/or bona fide and secure;

(c)the plaintiff would be stupid if the plaintiff did not proceed with the proposed investment;

(d)a bank guarantee would be in place securing the capital of US$2 million plus 8 per cent return before the funds would be released by Citibank in Australia;

(e)the A.N.Z. Bank had refused to transmit the plaintiff’s funds overseas because it was jealous of losing the plaintiff’s US$2 million and was not an internationally-minded bank and was not an international bank –

(‘further oral statements’).

Particulars

The further oral statements were oral and the making of the further oral statements is evidenced by the witness statement of Jennifer Harle dated 5 February, 2001 (paragraphs 13 and 14) and marked Exhibit ‘B’ and by the witness statement of Sabit Ozuslu dated 7 February 2001 (paragraphs 6 and 7) and marked Exhibit ‘E’ and evidence given at Transcript pages 306, 310, 311, 312, 329, 346, 347, 356, 365, 366, 367, 368 and 370.

11.      The letter:

(a)       was drafted by Harle on Sunday, 28 May, 1995;

(b)       was handed to the plaintiff on Monday, 29 May, 1995;

(c)       stated, inter alia:

(i)‘… I have examined the documents, have made enquiries of William McKay, Esther Tubman, Colin Mayman together with representative s of Citibank and advise that, on the basis of such examination and enquiries, I am satisfied that you should proceed with the same.’

(ii)‘… I also recommend that the wire transfer of funds to the account in the agreement be expressed to be conditional upon the terms of the master agreement between Smith Barney Inc, Chemical Bank and IUCF’.

12.The letter and the oral statements constituted express warranties and contractual undertakings within the meaning of clause 21 of the policy referred to in paragraph 9(2) hereof.

13.By reason of the matters contained in paragraphs 9 to 11 hereof, Harle is not entitled to be indemnified by the third party.

14.Further or in the alternative, by the letter dated 29 May, 1995 Harle impliedly represented that he had been provided with and had examined the master agreement between Smith Barney Inc., Chemical Bank and IUCF.

15.The letter and the oral statements and the further oral statements constituted representations within the meaning of clauses 15 and 22 of the policy which were false.

Particulars

(a)Harle had not by 28 May, 1995 or 29 May, 1995 examined the master agreement between Smith Barney Inc., Chemical Bank and IUCF;

(b)Harle had not by 28 May, 1995 or 29 May, 1995 been provided with the master agreement between Smith Barney Inc., Chemical Bank and IUCF nor did he even know whether it existed;

(c)Harle had not made any enquiries with Citibank on or by 29 May, 1995;

(d)Harle was not satisfied that the investment proposal was bona fide or genuine after making such enquiries;

(e)Harle had not checked out the reputations of the people involved, in particular the reputations of Burton, Steele, Tubman, Mayman, Leveraged Equity Investments Pty. Ltd. and IUCF;

(f)No bank guarantee would be obtained before the plaintiff’s funds left Citibank in Australia;

(g)The plaintiff would not be stupid if the plaintiff did not proceed with the proposed investment;

(h)The A.N.Z. Bank had not refused to release the plaintiff’s funds overseas because it was jealous or was not internationally-minded or an international bank.

16.At the time of making the representations referred to in paragraphs 14 and 15 hereof, Harle knew the representations to be false.

Particulars

(a)Harle has in a written statement to the third party stated that he was told by McKay, Steele and Burton that there was a master contract between Leveraged Equity Investments Pty. Ltd., IUCF, Chemical Bank, Smith Barney and ‘Scotside’ under the terms of which a prime bank guarantee would be provided and the trading bank operated and that the terms of the master contract could not be disclosed to the plaintiff or other investors, otherwise the trading programme would not proceed;

(b)Harle has in a written statement to the third party stated that on Friday, 26 May, 1995 he –

(i)had been told by the bank officer at the A.N.Z. Bank in the presence of the directors of the plaintiff that head office of the A.N.Z. Bank thought the trading [programme] may be a scam;

(ii)told McKay later by telephone that he had become concerned about the trading programme as a result of what the A.N.Z. Bank had said;

(iii)told McKay later by telephone that he was still concerned after speaking with Mayman and Tubman;

(c)Harle’s knowledge of the lack of bona fides of the investment proposal is inferred from the evidence he gave at page 124 of the transcript of the trial in the United States referred to in paragraph 1 hereof;

(d)Harle did not speak with anyone from Citibank until Monday, 29 May, 1995;

(e)Harle knew that no bank guarantee would be obtained before the plaintiff’s funds left Citibank in Australia;

(f)Harle knew the A.N.Z. Bank was internationally-minded and an international bank and was not jealous and the A.N.Z. had not refused to release the plaintiff’s funds overseas for such reasons;

(g)Harle knew the plaintiff would not be stupid for not proceeding with the proposed investment as the plaintiff’s money could have been safely invested earning between 7 and 7.58 per cent.

17.Further, Harle knowingly omitted to inform the plaintiff that Harle had not examined or seen the master agreement between Smith Barney Inc., Chemical Bank and IUCF referred to in his letter dated 29 May, 1995 as at 29 May, 1995 or at all.

18.If Harle is liable to the plaintiff and if Harle’s liability arises in connection with Harle’s legal practice (which is denied), then by reason of the matters set out in paragraphs 9, 10, 10A, 11, 14, 15, 16 and 17 hereof, the liability arises, in whole or in part, directly or indirectly or was brought about by the dishonesty or fraudulent act or omission of Harle within the meaning of clause 22 of the policy.

19.Alternatively to paragraph 18 hereof, by reason of the matters set out in paragraphs 9, 10, 10A, 11, 14, 15, 16 and 17 hereof Harle is obliged, under clause 15 of the policy, to indemnify the third party against any amount payable in respect of the representations, dishonesty, act or omission of Harle.”

1. In a reply dated 14 February 2001, Harle admitted that he gave Alianda general business advice and financial advice from time to time and that he was an accountant and a member of the Australian Society of Certified Practising Accountants.  He also said that:

“a.      the settlement was reasonable and was entered into on the basis of the advice of Mr J. Dixon dated 12/2/01 and Dr C. Pannam QC dated 19/5/97;

b.he was advised that the settlement figure of $1,500,000 was not negotiable and only available because he did not have the means to pay any sum ordered against him, except to the extent he was entitled to indemnify under the insurance policy;

c.he is within the description of a General Beneficiary of the Oz Family Trust because he is a brother of a Primary Beneficiary, Jennifer Harle; but as it is a discretionary trust he has no entitlement to a distribution under the trust.”

1. In relation to the alleged unreasonableness of the settlement and the lack of prior causes of the insurer he pleaded:

“3E.     As to paragraph 6E, he admits that he has settled the plaintiff’s claim and says that he was entitled to do so by reason of the third party’s wrongful repudiation of its liability under the Insurance Policy.

3F.Alternatively, by reason of s. 54 Insurance Contracts Act 1984, the third party may not refuse to pay the second defendant’s claim by reason of the acts alleged in paragraphs 6B & 6E of the Third Party’s Further Amended Defence but its liability in respect of the claim may only be reduced by the amount that fairly represents the extent to which the third party’s interests were prejudiced as a result of such acts.

Particulars

The acts alleged in paragraphs 6B & 6E of the Further Third Party’s Amended Defence occurred after the Insurance Contract was entered into.”

The witnesses

1. I found Mr Ozuslu and Ms Harle to be essentially honest witnesses but they had a poor recollection of detail and chronology.  In addition they were keen to state that they fully relied on their solicitor Harle and upon Citibank.  They were well aware that reliance was an important issue and were inclined to repeat parrot-fashion that they relied upon the defendants especially their solicitor in entering the transaction.  Nevertheless I was of the view that their evidence in that respect was in essence the truth.

1. Harle was able to provide a better chronological account of the relevant events but his evidence was in my view deliberately slanted to give an exaggerated and untrue impression of the degree to which Mr Ozuslu and Ms Harle were provided with information and documents by him and the extent to which they participated in meetings and understood what was happening.  Further, and importantly, there was an air of total unreality about his conduct throughout which was not dispelled in his evidence, upon cross-examination.  While I accept that he believed at the outset that the investment proposal was genuine and continued to so believe, I am satisfied that he must have known that there was a real risk that Alianda would lose its funds, a risk which he was prepared to take in the hope that he would earn US$2 million being his promised 10% of the profits.

1. I found McKay to be an unreliable witness in many respects.  He impressed me as an unethical charlatan.  It is unnecessary to decide whether he was anything worse.  In the end, his evidence does not in my view matter, except on a few points of chronological detail.

The insurance policy

1. The insurance policy contains the following conditions and provisions of particular relevance:

“  sum insured:  $1,500,000

period of insurance:  The calendar year 1999

insuring clauses

1.       Civil liability

The insurer will indemnify the insured against any civil liability in connection with the Firm’s legal practice in respect of which a claim is first made against an insured –

(a)      during the period of insurance; or

(b)during or after the period of insurance and arising from a reported circumstance.

…

11.Breach of conditions

The insurer will not refuse liability or reduce its liability (or delay any settlement with or payment to a claimant) by reason of a breach by any insured of –

(a)     a condition of this contract;  or

(b)any duty to the Insurer (including the duty of utmost good faith but excluding the duty of disclosure)

but each principal of the firm when the circumstances giving rise to the loss occurred will jointly and severally indemnify the Insurer to the extent that the Insurer’s interests were prejudiced as a result of any such breach and will pay interest on the amount outstanding to the Insurer from time to time calculated daily at the rate specified by the Penalty Interest Rates Act 1983.

exclusions

16.     General

The Insurer will not indemnify any Insured against any liability (or defence costs) as follows:

…

21.     Contractual undertaking

Arising from an express warranty, guarantee, indemnity or other contractual undertaking to the extent that –

(a)it extends a duty of any Insured beyond exercising the standard of care and skill reasonably to be expected in the circumstances;  or

(b)it increases the compensation or damages for which any Insured is liable for breach of duty beyond the amount payable in tort.

22.Fraud or dishonesty

Arising, in whole or in part, directly or indirectly from, or brought about by –

(a)the dishonesty or fraudulent act or omission of any Insured on or before 31 December 1997…

36.No admission of liability

No Insured will admit liability for or settle any claim in respect of which the Insurer is liable to indemnify any Insured without the prior consent of the Insurer.  If the Firm wishes a claim to be settled but the Insurer refuses consent, the Insurer will brief Queen’s Counsel (to be mutually agreed or, in default of agreement, to be selected by the President of the Law Institute of Victoria) to advise on whether or not the claim against the Insured is likely to succeed.  If counsel’s advice is that the claim is likely to succeed, the Insurer shall take such steps as are mutually agreed to settle the claim on terms to be mutually agreed and, in default of agreement, such steps and such terms as counsel advises having due regard to the interests of both the Insured and the Insurer.  Counsel’s fee will in each case be payable by the party against whose contention counsel advised.”

The insurer’s defence

1. The essence of the defence was put by Mr Clarke of counsel for the insurer as follows.  Harle did not act for Alianda in May 1995 as a solicitor but as a business and financial adviser.  Alternatively, if he did act as a solicitor for Alianda at that time, then his advice was clearly negligent but it was also given dishonestly.  The critical advice for this purpose was that which was given by Harle after the ANZ Bank had said the proposal was or might be a scam.  The advice to proceed with the investment was dishonest as to its contents and also was dishonest in the sense that Harle did not believe that the proposal was genuine, or at least did not believe that it was risk-free, but wanted Alianda to proceed because he did not wish to lose the opportunity to earn his 10% fee (ie US$2M).  Harle had nothing to lose and did not care that his sister and brother-in-law were risking their funds.

Civil liability in connection with Harle’s legal practice

1. I am satisfied on the balance of probabilities that by no later than 20 May 1995, when Harle opened his file no. 814, Harle had been retained by Ms Harle on behalf of Alianda to act as Alianda’s solicitor in advising with respect to, and giving effect to, the investment proposal.

1. I accept the evidence of Mr Ozuslu and Ms Harle, and Harle himself, that Harle acted as Alianda’s solicitor in respect of this transaction as he had in respect of others in the past.  That evidence is corroborated by contemporaneous evidence, namely, the letter from Harle to Alianda dated 29 May 1995, faxes from Harle to Citibank dated 31 May 1995 and 5 June 1995, the letter from Harle to Citibank dated 13 June 1995 and the memorandum from Ms Harle for Alianda sent to Citibank on 15 June 1995.  The documents emanating from Harle were all on his solicitor’s letterhead.  The memorandum from Ms Harle described Harle as “my solicitor”. 

1. I do not think that the somewhat unsatisfactory evidence as to whether Harle’s legal fees were or were not charged or were or were not paid detracts from the above conclusion having regard to the nature of the family relationship.  I think that the evidence given by Harle at the trial in New York is not, when considered as a whole, destructive of the above conclusion.

1. Once it is found that Harle relevantly acted as Alianda’s solicitor, there was no real dispute that Harle was professionally negligent both in relation to the advice which he gave and that which he omitted to give in the period from 26 May 1995 to 29 May 1995 and thereafter.

1. The civil liability dealt with by the terms of settlement between Alianda and Harle was thus incurred in connection with Harle’s legal practice.

Bona fide and reasonable settlement

1. In my opinion the settlement was both bona fide and reasonable.  It was based on sound legal advice.  In reality, Harle was facing (almost inevitably) judgment for damages in the full amount of the loss plus interest.

Settlement without the insurer’s consent

1. This defence was not pressed having regard to the terms of clause 11 of the insurance policy, alternatively, section 54 of the Insurance Contracts Act.

Dishonesty

1. It seems to me that the critical defence of the insurer is based upon clauses 16 and 22 of the Exclusions:  the insurer will not indemnify the insured against any liability arising, in whole or in part, directly or indirectly from, or brought about by, the dishonesty or fraudulent act or omission of the insured.

1. In McMillan v Joseph,[1] Cooke P said (at 70,054):

   [1](1987) 4 ANZ Insurance Cases 60-822 (Court of Appeal of New Zealand).

“Here we are concerned with the use of ‘dishonest’ in an exception clause where it is accompanied by ‘fraudulent criminal or malicious’ and is evidently used in a wide general sense, rather than some special one.  Perhaps the only workable answer in such a context is that the tribunal of fact has to make up its own mind whether, according to the ordinary understanding of this ordinary English word, it is satisfied that the actions in question were dishonest.  On many frontiers of the law that kind of answer has to be given, one way or another, to the most difficult of questions.”

In the same case, Somers J said (at 74,055): 

“The description of the excepted acts or omissions – dishonest fraudulent criminal or malicious – indicates that the word ‘dishonest’ is to be given its natural meaning of deliberate conduct which is dishonest according to ordinary professional standards, in this case of solicitors.  Little is to be gained from attempting to supply a synonym or a description of what is dishonest.  The word has overtones of lack of probity, conduct that is underhand, not straightforward, that is dishonourable or disgraceful.  I did not understand counsel to disagree with the Judge’s view of the meaning of dishonesty namely deliberate conduct such as to be called ‘not straightforward’ and ‘underhand’.  He added that ‘This necessarily involves an intention to deceive’.  With respect, I do not think that this is so.  Thus in the case of theft, deceit is not a necessary ingredient.

The line between negligence, however gross in character, and dishonesty may sometimes be a fine one, but will usually be recognisable.”

Again in that case, Casey J said (at 75,056): 

“… I accept the appellant’s submissions that ‘dishonest’ is used in the sense of deliberate conduct carrying its ordinary meanings (amongst others) of ‘not straightforward’ and ‘underhand’.  Like fraud, the term is one of wide application in the almost infinite variety of human activity and while the general concepts it embodies are well understood, attempts to analyse or define them narrowly are usually fruitless.  In any given case a decision on whether conduct is dishonest is best left to the common sense and experience of the judge or jury after consideration of all the relevant circumstances.  The test is an objective one and in the context of this policy the insured’s conduct is to be judged by that standard of honesty generally accepted as appropriate for members of the legal profession in their dealings with their clients.  Because of the trust reposed in them it may well be higher than the standards expected in some other areas of business or commercial life.“

1. In East End Real Estate Pty Ltd v C.E. Heath Casualty & General Insurance Ltd,[2] Rolfe J referred with approval to what was said by Somers J (quoted above) and added (at 77,798):

“’Dishonest’, in my opinion, generally connotes a degree of moral turpitude or delinquency, which transcends such a breach of duty.  In each of the authorities to which I have referred there was conduct which could be characterised in that way and, accordingly, in each decision it was found that there had been dishonesty.

It does not require very much more than the breach of duty to bring about dishonesty.”

[2](1993) 7 ANZ Insurance Cases 61-151 (Supreme Court of New South Wales).

1. In McCann v Switzerland Insurance Australia Ltd,[3] Hunter J at first instance referred to what was said by the members of the New Zealand Court of Appeal in McMillan but added the following (at 74,884): 

“In proceedings such as these proceedings, I think more is required in terms of the finding of dishonest conduct for the purpose of the construction of the dishonesty exclusion than reliance upon one’s ‘common sense and experience’, nor do I subscribe to the view that in some undefined way the standard of honesty of a legal professional person ‘may well be higher than the standards expected in some other areas of business or commercial life’.  No doubt the nature of the duty or responsibilities owed or assumed in a particular case will draw for its content upon the nature of the relationship, be it a commercial or professional one which may underlie the relevant conduct.  Beyond that, I would have some difficulty in ascribing to a professional person some higher concept of standards than those of the commercial world, regardless of the ideals retained by, perhaps, a majority of participants in a particular profession in their practice of the profession.  Whatever the test, the nature of the conduct with which the court was concerned in McMillan left little room for speculation as to its dishonesty…

For the purpose of these proceedings, I doubt that much assistance is gained from applying concepts of deliberation and lack of straightforwardness.  One thing which I think does emerge from the judgment is the exclusion of an intention to deceive as a necessary ingredient of dishonesty.”

[3](1999) 10 ANZ Insurance Cases 61-432 (Supreme Court of New South Wales).

1. Hunter J (at 74,885) referred to a decision of Steel J (Queen’s Bench Division) in Abbey National Plc v Solicitors Indemnity Fund Ltd,[4] where Steel J said:

“The two words ‘dishonesty’ and ‘fraud’ have been said to be interchangeable in the authorities and I accept that the same standard applies to each.  There must be a high degree of moral opprobrium before I can make a finding of dishonesty or fraud.  I am reminded carelessness is not dishonesty or fraud.  Incompetence is not dishonesty or fraud, and I have been referred to a number of authorities which assist in relation to the ways dishonesty and fraud have been described and defined by the courts.  The first of those is the case of Derry v Peek (1889) 14 App. Cas. 337. Fraud there is defined in the headnote. R v. Ghosh [1982] I Q.B. 1053 is a more recent authority.  The judgment of Lord Lane in that case sets out definitively the test to be applied in a criminal case, which is a combination of an objective and a subjective test…”

and in which Steel J went on to apply this test:

“Was what he did dishonest by the standards of ordinary reasonable, honest, people?  And were the circumstances such that he, himself, must have known that what he did was by those standards dishonest?”

[4](1997) PNLR 306, 316-7.

1. As to dishonesty I would adopt the approach expressed in the above quotations from Cooke P,  Somers J, Hunter J, and Steel J.

1. I have also considered the judgments given on appeal from Hunter J in McCann v Switzerland Finance.[5]  Those judgments turned very much upon showing how the precise facts in the case demonstrated the existence of dishonesty and fraud and counsel  referred to the judgments in order to indicate some of the factual similarities (and differences) with the present case.

   [5]In the High Court: see [2000] HCA 65; (2000) 75 ALJR 325; 176 ALR 711; 11 ANZ Insurance Cases 61-479; in the Court of Appeal of New South Wales: see [1999] NSWCA 310; (1999) 10 ANZ Insurance Cases 61-446.

1. In the present case, one can perhaps understand how, by a combination of stupidity, gullibility, incompetence and cupidity, a solicitor might permit his clients to enter an investment proposal such as this one, notwithstanding the nature of the documentation provided, the absence of other documentation including the key security of the guarantee, the fantastic profits promised and the obvious risks looking at the transaction as a whole. However it is indeed staggering to contemplate that any solicitor, having been warned by a reputable banking organisation that the proposed investment may be a scam, could doggedly proceed, ignore all the further warning signs when parties to the transaction were changed and press on until the client’s funds were lost.  Nevertheless, negligence, even gross negligence, is not of itself dishonesty.

1. The critical conduct is I think, as Mr Clarke submitted, the advice given by Harle on 29 May 1995.  The advice was given by the solicitor’s letter to Alianda of that date.  I am satisfied to the requisite degree that Harle’s advice was both objectively and subjectively dishonest. I first have regard to both what the letter said and to what it did not say.  The advice must be considered in the context that Ms Harle had told her brother that they would be relying upon him as their lawyer to ensure that the investment was legal and above board and that all of the “i’s” were dotted and the “t’s” crossed and there could not be any risk that they could lose their capital. 

1. It was false and misleading to tell the client that “I have examined the documents” when Harle had not seen the so-called master agreement or the "prime bank" guarantee which was supposed to be provided as a condition of the release of the funds by the bank receiving those funds in the USA.  Telling the client that “I have examined the documents” was also calculated to lead the client to believe that all the “i’s” were dotted and all the “t’s” were crossed when an examination of the disclosed documents ought to have raised many questions as to their form, meaning and expression.  I am quite satisfied that Harle must have known that this statement was misleading and must have known that it was likely to reassure his sister who had on the previous Friday been told that the whole proposal might be a scam.

1. It was also false and misleading for Harle to state that having “made inquiries… with representatives of Citibank… I am satisfied that the investment proposal is bona fide”.  Harle had made no relevant inquiries of the representatives of Citibank and well knew that Citibank had no knowledge or information of the investment proposal. Indeed, Citibank was subsequently not even given the limited documentation which had been supplied to the ANZ bank.  This false statement was calculated to mislead the client into believing that Citibank, in contradistinction to the ANZ bank, harboured no suspicions concerning the investment proposal.  I am quite satisfied that Harle must have intended this phraseology to have this effect – indeed one can conceive of no other purpose for mentioning Citibank in this context.  Of course, in the absence of Citibank, no independent enquiries were made at all because the other persons mentioned were all purveyors of the proposal and unlikely (to say the least) to cast doubt upon its bona fides.

1. The letter is also dishonest in relation to what it does not say.  Harle does not warn the client of the risks attendant upon the investment either generally or in the light of the warnings by the ANZ bank.  Harle must have known that there were real risks.  Why else speak of parties who could be held responsible “for any loss reasonably foreseeable as a consequence of” the representations of “the parties I have spoken to”?  No mention is made of the risk that “the parties I have spoken to” would not be able or not be likely to make good any loss which occurred if the proposal was in truth a scam.  I am satisfied that the advice was a dishonest act intended by Harle to persuade and intended by him not to provide the client with reasoned advice upon which it could make an informed decision.  I have concentrated upon the letter of advice but most of the same points are applicable to the oral advice from Harle which was given on the Saturday and upon which they both also relied.

1. It is unnecessary to decide whether the phrase “fraudulent act or omission” (in exclusion 22(a)) has any wider scope or meaning than “dishonesty”.[6]

   [6]Cf. H. G. & R. Nominees Pty Ltd v Fava [1997] 2 VR 368, 421 per J.D. Phillips J).

1. I am satisfied that Harle’s liability to Alianda was “brought about by” his dishonest advice because I find that Mr Ozuslu and Ms Harle acted on Harle's advice and that they would not have permitted this investment to proceed if they had received honest advice from Harle as to the risks involved, in the period after their visit to the ANZ bank and before the funds were transferred.  Alternatively, Harle’s liability arose “in whole or in part, directly or indirectly” from such dishonesty.

1. The result is that Harle’s claim for indemnity fails and there must be judgment for the insurer against Harle in the third party proceeding.

1. Having regard to the July vacation, I will extend the time for appeal to 31 July 2001. I will hear the parties on the question of costs on 20 July 2001.

---